FOREX MASTERY ACADEMY @Zw
Time Frames In Forex
Utilizing different forex time frames can assist traders to spot the larger trends and more granular price action that may be unfolding.
Different viewpoints can be formed when switching between different time frames on the same currency pair and this can either benefit or hinder the analysis. Therefore, it is crucial to have a solid understanding of forex trading time frames from the very first trade.
Forex trading time frames are commonly classified as long-term, medium-term and short-term. Traders have the option of incorporating all three, or simply using one longer and one shorter time frame when analyzing potential trades. While the longer time frames are beneficial for identifying a trade set up, the shorter time frames are useful for timing entries.
Forex trading time frames are commonly classified as long-term, medium-term and short-term. Traders have the option of incorporating all three, or simply using one longer and one shorter time frame when analyzing potential trades. While the longer time frames are beneficial for identifying a trade set up, the shorter time frames are useful for timing entries.
Multiple time frame analysis is simply the process of looking at the same pair and the same price but on different time frames. Remember, a pair exists on several time frames – the daily, the hourly, the 15-minute, heck, even the 1-minute!
When you use a chart, you’ll notice that there are different time frames being provided.
Different Chart Time Frames
The current chart above is the “1 day” or daily time frame.
When you click on the “1 hour”, it will bring out the 1-hour chart. If you click on “5 minutes”, it will bring out the 5-minute chart and so on.
There is a reason why chart apps offer so many time frames. It’s because there are different market participants in the market.
This means that different forex traders can have their different opinions on how a pair is trading and both can be completely correct.
Some will be traders who will focus on 10-minute charts while others will focus on the weekly charts.
Trade 1may see that EUR/USD is on a downtrend on the 4-hour chart.
When you use a chart, you’ll notice that there are different time frames being provided.
Different Chart Time Frames
The current chart above is the “1 day” or daily time frame.
When you click on the “1 hour”, it will bring out the 1-hour chart. If you click on “5 minutes”, it will bring out the 5-minute chart and so on.
There is a reason why chart apps offer so many time frames. It’s because there are different market participants in the market.
This means that different forex traders can have their different opinions on how a pair is trading and both can be completely correct.
Some will be traders who will focus on 10-minute charts while others will focus on the weekly charts.
Trade 1may see that EUR/USD is on a downtrend on the 4-hour chart.
However,Trader 2 trades on the 5-minute chart and sees that the pair just ranging up and down. And they could both be correct!
As you can see, this poses a problem.
Trades sometimes get confused when they look at the 4-hour, see that a sell signal, then they hop on the 1-hour and see price slowly moving up.
What Time Frame Should I Trade?
One of the reasons newbie forex traders don’t do as well as they should is because they’re usually trading the wrong time frame for their personality.
New forex traders will want to get rich quick so they’ll start trading small time frames like the 1-minute or 5-minute charts.
Then they end up getting frustrated when they trade because the time frame doesn’t fit their personality.
Know which time frame you should trade on as a forex trader.
For some forex traders, they feel most comfortable trading the 1-hour charts.
This time frame is longer, but not too long, and trade signals are fewer, but not too few.
Trading on this time frame helps give more time to analyze the market and not feel so rushed.
👉It depends on your personality. You have to feel comfortable with the time frame you’re trading in.
You’ll always feel some kind of pressure or sense of frustration when you’re in a trade because real money is involved.
That’s natural.
But you shouldn’t feel that the reason for the pressure is because things are happening so fast that you find it difficult to make decisions or so slowly that you get frustrated.
When we first started trading, we couldn’t stick to a time frame.
This is natural for all new forex traders until you find your comfort zone
Some of the basic time frames and the differences between each.
👉💰You also have to consider the amount of capital you have to trade.
Shorter time frames allow you to make better use of margin and have tighter stop losses.
Larger time frames require bigger stops, thus a bigger account, so you can handle the market swings without facing a margin call.
The most important thing to remember is that whatever time frame you choose to trade, it should naturally fit your personality.
If you feel a little uncomfortable like your undies are loose or your pants are little too short, then maybe it’s just not the right fit.
When the market stalls or reverse on the 15-minute chart, it was often because it had hit support or resistance on a larger time frame.
It took a couple of hundred negative pips to learn that the larger the time frame, the more likely an important support or resistance levels would hold.
See the Big Picture
Trading using multiple time frames has probably kept us out of more losing trades than any other one thing alone.
It will allow you to stay in a trade longer because you’re able to identify where you are relative to the BIG PICTURE.
Most beginners look at only one time frame.
They grab a single time frame, apply their indicators, and ignore other time frames.
The problem is that a new trend, coming from another time frame, often hurts forex traders who don’t look at the big picture.
It took a couple of hundred negative pips to learn that the larger the time frame, the more likely an important support or resistance levels would hold.
See the Big Picture
Trading using multiple time frames has probably kept us out of more losing trades than any other one thing alone.
It will allow you to stay in a trade longer because you’re able to identify where you are relative to the BIG PICTURE.
Most beginners look at only one time frame.
They grab a single time frame, apply their indicators, and ignore other time frames.
The problem is that a new trend, coming from another time frame, often hurts forex traders who don’t look at the big picture.
Multiple time frame analysis
You have to remember, a trend on a longer time frame has had more time to develop, which means that it will take a bigger market move for the pair to change course.
Also, support and resistance levels are more significant on longer time frames.
Start off by selecting your preferred time frame and then go up to the next higher time frame.
There you can make a strategic decision to go long or short based on whether the market is ranging or trending.
You would then return to your preferred time frame (or even lower!) to make tactical decisions about where to enter and exit (place stop and profit target).
Just so you know, this is probably one of the best uses of multiple time frame analysis…you can zoom in to help you find better entry and exit points.
☝️There is obviously a limit to how many time frames you can study. You don’t want a screen full of charts telling you different things.
Use at least TWO, but not more than THREE time frames.
Adding more will just confuse f you and you’ll suffer from analysis paralysis, then proceed to go crazy.
At the end of the day, it really is all about finding what works best for you.
You have to remember, a trend on a longer time frame has had more time to develop, which means that it will take a bigger market move for the pair to change course.
Also, support and resistance levels are more significant on longer time frames.
Start off by selecting your preferred time frame and then go up to the next higher time frame.
There you can make a strategic decision to go long or short based on whether the market is ranging or trending.
You would then return to your preferred time frame (or even lower!) to make tactical decisions about where to enter and exit (place stop and profit target).
Just so you know, this is probably one of the best uses of multiple time frame analysis…you can zoom in to help you find better entry and exit points.
☝️There is obviously a limit to how many time frames you can study. You don’t want a screen full of charts telling you different things.
Use at least TWO, but not more than THREE time frames.
Adding more will just confuse f you and you’ll suffer from analysis paralysis, then proceed to go crazy.
At the end of the day, it really is all about finding what works best for you.
Trading With Three Time Frames
Determine Main Trend
The largest time frame we consider our main trend – this shows us the big picture of the pair we wanna trade.
For example, on the daily chart, EUR/USD is trading above the 200 SMA which tells you that the main trend is UP.
Determine Current Market Bias
The next time frame down is what we normally look at, and it signals to us the medium-term buy or selling.
Here is a 4-hour chart and it’s clear that EUR/USD continues to have a bullish trend.
Determine Entry and Exit
Determine Main Trend
The largest time frame we consider our main trend – this shows us the big picture of the pair we wanna trade.
For example, on the daily chart, EUR/USD is trading above the 200 SMA which tells you that the main trend is UP.
Determine Current Market Bias
The next time frame down is what we normally look at, and it signals to us the medium-term buy or selling.
Here is a 4-hour chart and it’s clear that EUR/USD continues to have a bullish trend.
Determine Entry and Exit
The smallest time frame shows the short term trend and helps us find really good entry and exit points
✅Multiple Time Frame Combinations
You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement.
You might use:
1-minute, 5-minute, and 30-minute
5-minute, 30-minute, and 4-hour
15-minute, 1-hour, and 4-hour
1-hour, 4-hour, and daily
4-hour, daily, and weekly and so on.
☝️When you’re trying to decide how much time in between charts, just make sure there is enough difference for the smaller time frame to move back and forth without every move reflecting in the larger time frame.
If the time frames are too close, you won’t be able to tell the difference, which would be pretty useless.
✅Multiple Time Frame Combinations
You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement.
You might use:
1-minute, 5-minute, and 30-minute
5-minute, 30-minute, and 4-hour
15-minute, 1-hour, and 4-hour
1-hour, 4-hour, and daily
4-hour, daily, and weekly and so on.
☝️When you’re trying to decide how much time in between charts, just make sure there is enough difference for the smaller time frame to move back and forth without every move reflecting in the larger time frame.
If the time frames are too close, you won’t be able to tell the difference, which would be pretty useless.
A forex trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market. That’s right… EVERYONE.
This combined feeling that market participants have is what we call market sentiment.
It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market.
As a forex trader, it is your job to gauge what the market is feeling. Are the indicators pointing towards bullish conditions?
Are traders bearish on the economy?
We can’t tell the market what we think it should do. But what we can do is react in response to what is happening in the markets.
☝️Using the market sentiment approach doesn’t give a precise entry and exit for each trade.aving a sentiment-based approach can help you decide whether you should go with the flow or not.
Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.
In stocks and options, traders can look at volume traded as an indicator of sentiment.
If a stock price has been rising, but volume is declining, it may signal that the market is overbought.
Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish.
This combined feeling that market participants have is what we call market sentiment.
It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market.
As a forex trader, it is your job to gauge what the market is feeling. Are the indicators pointing towards bullish conditions?
Are traders bearish on the economy?
We can’t tell the market what we think it should do. But what we can do is react in response to what is happening in the markets.
☝️Using the market sentiment approach doesn’t give a precise entry and exit for each trade.aving a sentiment-based approach can help you decide whether you should go with the flow or not.
Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.
In stocks and options, traders can look at volume traded as an indicator of sentiment.
If a stock price has been rising, but volume is declining, it may signal that the market is overbought.
Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish.
Commitment of Traders Report
The Commodity Futures Trading Commission, or CFTC, publishes the Commitment of Traders report (COT) every Friday, around 2:30 pm EST.
Because the COT measures the net long and short positions taken by speculative traders and commercial traders, it is a great resource to gauge how heavily these market players are positioned in the market.These are the hedgers, large speculators, and retail traders.
Just like players in a team sport, each group has its unique characteristics and roles.
By watching the behavior of these players, you’ll be able to foresee incoming changes in market sentiment.
The Commitment of Traders report from the futures market.
The Commodity Futures Trading Commission, or CFTC, publishes the Commitment of Traders report (COT) every Friday, around 2:30 pm EST.
Because the COT measures the net long and short positions taken by speculative traders and commercial traders, it is a great resource to gauge how heavily these market players are positioned in the market.These are the hedgers, large speculators, and retail traders.
Just like players in a team sport, each group has its unique characteristics and roles.
By watching the behavior of these players, you’ll be able to foresee incoming changes in market sentiment.
The Commitment of Traders report from the futures market.
The COT Report
Open up the address below in your web browser. Link Here
The Commitments of Traders (COT) Report
Step 2:
Once the page has loaded, scroll down a couple of pages to the “Current Legacy Report” and click on “Short Format” under “Futures Only” on the “Chicago Mercantile Exchange” row to access the most recent COT report.
Open up the address below in your web browser. Link Here
The Commitments of Traders (COT) Report
Step 2:
Once the page has loaded, scroll down a couple of pages to the “Current Legacy Report” and click on “Short Format” under “Futures Only” on the “Chicago Mercantile Exchange” row to access the most recent COT report.
Step 3:
It may seem a little intimidating at first because it looks like a big giant gobbled-up block of text but with a little bit of effort, you can find exactly what you’re looking for.
Just press CTRL+F (or whatever the find function is of your browser) and type in the currency you want to find.
To find the British Pound Sterling, or GBP, for example, just search up “Pound Sterling” and you’ll be taken directly to a section that looks something like this:☝️
👉Commercial: These are the big businesses that use currency futures to hedge and protect themselves from too much exchange rate fluctuation.
👉Non-Commercial: This is a mixture of individual traders, hedge funds, and financial institutions. For the most part, these are traders who looking to trade for speculative gains. In other words, these are traders just like you who are in it for the Benjamins!
👉Long: That’s the number of long contracts reported to the CFTC.
👉Short: That’s the number of short contracts reported to the CFTC.
👉Open interest: This column represents the number of contracts out there that have not been exercised or delivered.
👉Number of traders: This is the total number of traders who are required to report positions to the CFTC.
👉Reportable positions: The number of options and futures positions that are required to be reported according to CFTC regulations.
👉Non-reportable positions: The number of open interest positions that do not meet the reportable requirements of the CFTC like retail traders.
✅In order to understand the futures market, first you need to know the people making the shots and those who are warming up the bench.
These players could be categorized into three basic groups:
Commercial traders (Hedgers)
Non-commercial traders (Large Speculators)
Retail traders (Small Speculators)
✅Commercial Traders
Hedgers or commercial traders are those who want to protect themselves against unexpected price movements.
Agricultural producers or farmers who want to hedge (minimize) their risk in changing commodity prices are part of this group.
Banks or corporations who are looking to protect themselves against sudden price changes in currencies or other assets are also considered commercial traders.
A key characteristic of hedgers is that they are most bullish at market bottoms and most bearish at market tops.
✅The Large Speculators
In contrast to hedgers, who are not interested in making profits from trading activities, speculators are in it for the money and have no interest in owning the underlying asset!
Many speculators are known as hardcore trend followers since they buy when the market is on an uptrend and sell when the market is on a downtrend.
They keep adding to their position until the price movement reverses.
Large speculators are also big players in the futures market since they hold huge accounts.
As a result, their trading activities can cause the market to move dramatically. They usually follow moving averages and hold their positions until the trend changes.
👉The Small Speculators
Small speculators, on the other hand, own smaller retail accounts. These comprise of hedge funds and individual traders.
They are known to be anti-trend and are usually on the wrong side of the market. Because of that, they are typically less successful than hedgers and commercial traders.
However, when they do follow the trend, they tend to be highly concentrated at market tops or bottoms.
Pick Tops and Bottoms With the COT Report
While hedgers buy when the market is bottoming, speculators sell as the price moves down.
Here’s that COT report chart again:☝️
✅Hedgers are bearish when the market moves to the top while speculators are bullish when the price is climbing.
As a result, speculative positioning indicates trend direction while commercial positioning could signal reversals.
If hedgers keep increasing their long positions while speculators increase their short positions, a market bottom could be in sight.
If hedgers keep adding more short positions while speculators keep adding more long positions, a market top could occur.
Of course, it’s difficult to determine the exact point where a sentiment extreme will occur so it might be best to do nothing until signs of an actual reversal are seen.
✅We could say that speculators, because they follow the trend, catch most of the move BUT are wrong on turning points.
Commercial traders, on the other hand, miss most of the trend EXCEPT when price reverses.
Until a sentiment extreme occurs, it would be best to go with the speculators.
The basic rule is this: every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme results in a market top or bottom.
👉Create Your Own COT Trading Indicator
Below is a step-by-step process on how to create this index.
Decide how long of a period we want to cover. The more values we input into the index, the less sentiment extreme signals we will receive, but the more reliable it will be. Having fewer input values will result in more signals, although it might lead to more false positives.
Calculate the difference between the positions of large speculators and commercial traders for each week.
The formula for calculating this difference is:
Difference = Net position of Large Speculators – Net position of Commercials
☝️Take note that if large speculators are extremely long, this would imply that commercial traders are extremely short.
This would result in a positive figure.
On the other hand, if large speculators are extremely short, that would mean that commercial traders are most likely extremely long. this would result in a negative figure.
This would result in a negative figure.
Rank these results in ascending order, from most negative to most positive.
Assign a value of 100 to the largest number and 0 to the smallest figure.
And now we have a COT indicator!
✅This is very similar to the RSI and Stochastic indicators that we’ve discussed in earlier lessons.
Once we have assigned values to each of the calculated differences, we should be alerted whenever new data inputted into the index shows an extreme: 0 or 100.
This would indicate that the difference between the positions of the two groups is largest and that a reversal may be imminent.
Remember, we are interested in knowing whether the trend is going to continue or if it is going to end.
If the COT report reveals that the markets are at extreme levels, it would help pinpoint those tops and bottoms that we all love so much.
While hedgers buy when the market is bottoming, speculators sell as the price moves down.
Here’s that COT report chart again:☝️
✅Hedgers are bearish when the market moves to the top while speculators are bullish when the price is climbing.
As a result, speculative positioning indicates trend direction while commercial positioning could signal reversals.
If hedgers keep increasing their long positions while speculators increase their short positions, a market bottom could be in sight.
If hedgers keep adding more short positions while speculators keep adding more long positions, a market top could occur.
Of course, it’s difficult to determine the exact point where a sentiment extreme will occur so it might be best to do nothing until signs of an actual reversal are seen.
✅We could say that speculators, because they follow the trend, catch most of the move BUT are wrong on turning points.
Commercial traders, on the other hand, miss most of the trend EXCEPT when price reverses.
Until a sentiment extreme occurs, it would be best to go with the speculators.
The basic rule is this: every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme results in a market top or bottom.
👉Create Your Own COT Trading Indicator
Below is a step-by-step process on how to create this index.
Decide how long of a period we want to cover. The more values we input into the index, the less sentiment extreme signals we will receive, but the more reliable it will be. Having fewer input values will result in more signals, although it might lead to more false positives.
Calculate the difference between the positions of large speculators and commercial traders for each week.
The formula for calculating this difference is:
Difference = Net position of Large Speculators – Net position of Commercials
☝️Take note that if large speculators are extremely long, this would imply that commercial traders are extremely short.
This would result in a positive figure.
On the other hand, if large speculators are extremely short, that would mean that commercial traders are most likely extremely long. this would result in a negative figure.
This would result in a negative figure.
Rank these results in ascending order, from most negative to most positive.
Assign a value of 100 to the largest number and 0 to the smallest figure.
And now we have a COT indicator!
✅This is very similar to the RSI and Stochastic indicators that we’ve discussed in earlier lessons.
Once we have assigned values to each of the calculated differences, we should be alerted whenever new data inputted into the index shows an extreme: 0 or 100.
This would indicate that the difference between the positions of the two groups is largest and that a reversal may be imminent.
Remember, we are interested in knowing whether the trend is going to continue or if it is going to end.
If the COT report reveals that the markets are at extreme levels, it would help pinpoint those tops and bottoms that we all love so much.
The Dangers of Trading the News
As with any trading strategy, there are always possible dangers that you should be aware of.
When news comes out, especially important news that everyone is watching, you can almost expect to see some major movement.
The fact that you know the market will most likely move somewhere makes it an opportunity definitely worth looking at.
Your goal then, as a news trader, is to get on the correct side of the move.
Spreads Widen
Because the forex market is very volatile during important news events, many forex brokers WIDEN the spread during these times.
As with any trading strategy, there are always possible dangers that you should be aware of.
When news comes out, especially important news that everyone is watching, you can almost expect to see some major movement.
The fact that you know the market will most likely move somewhere makes it an opportunity definitely worth looking at.
Your goal then, as a news trader, is to get on the correct side of the move.
Spreads Widen
Because the forex market is very volatile during important news events, many forex brokers WIDEN the spread during these times.
This increases trading costs and could hurt your bottom line.
You could also get “locked out” which means that your trade could be executed at the right time but may not show up in your trading platform for a few minutes.
This is bad for you because you won’t be able to make any adjustments if the trade moves against you!
Imagine thinking you didn’t get triggered, so you try to enter at the market price… only to realize that your original order got triggered!
Price Slippage
You could also experience SLIPPAGE.
This is bad for you because you won’t be able to make any adjustments if the trade moves against you!
Imagine thinking you didn’t get triggered, so you try to enter at the market price… only to realize that your original order got triggered!
Price Slippage
You could also experience SLIPPAGE.
Slippage occurs when you wish to enter the market at a certain price, but due to the extreme volatility during these events, you actually get filled at a far DIFFERENT price.
Big market moves made by news events often don’t move in one direction.
Often times the market may start off flying in one direction, only to be whipsawed back in the other direction.
Trying to find the right direction can sometimes be a headache!
Profitable as it may be, trading the news isn’t as easy as beating some toddler at Fornite. It will take tons of practice, practice and you guessed it… more practice!
Most importantly, you must ALWAYS have a plan in place.
Forex traders should familiarize themselves with the key event risks that heavily impact the major currencies.
Big market moves made by news events often don’t move in one direction.
Often times the market may start off flying in one direction, only to be whipsawed back in the other direction.
Trying to find the right direction can sometimes be a headache!
Profitable as it may be, trading the news isn’t as easy as beating some toddler at Fornite. It will take tons of practice, practice and you guessed it… more practice!
Most importantly, you must ALWAYS have a plan in place.
Forex traders should familiarize themselves with the key event risks that heavily impact the major currencies.
Remember that we are trading the news because of its ability to increase volatility in the short-term, so naturally, we would like to only trade news that has the best market-moving potential for the currency market.
The news that tends to drive price action and produce volatility usually involves:
👉Changes in central bank policy (“monetary policy”)
👉Shifts in government policy (“fiscal policy“)
👉Unexpected results in economic data releases
👉Random tweets from a certain world leader who likes to put his name on tall buildings
The number of events scheduled can reach over a hundred on any given week! Trying to sift through so many events can be a pain in the butt.
The news that tends to drive price action and produce volatility usually involves:
👉Changes in central bank policy (“monetary policy”)
👉Shifts in government policy (“fiscal policy“)
👉Unexpected results in economic data releases
👉Random tweets from a certain world leader who likes to put his name on tall buildings
The number of events scheduled can reach over a hundred on any given week! Trying to sift through so many events can be a pain in the butt.
The Economic Calendar makes it easy to identify the relative importance of each specific event.
✅If you spend some time exploring the Economic Calendar, you’ll start to notice that the most important events usually relate to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and consumer sentiment.
Here are some examples:
👉Interest rate decisions by central banks
👉Inflation (CPI, PCE, PPI)
👉Employment data (unemployment, wage growth)
👉Economic growth (GDP)
👉Retail sales
👉Industrial production
👉Business sentiment surveys
👉Manufacturing sector surveys
👉Consumer confidence surveys
👉Housing data (sales, construction)
👉Trade balance
✅Different countries may use different names for similar data but we try to point that out in the Economic Calendar.
Depending on what’s currently happening in the world, the relative importance of this event may change.
For example, interest rate decisions may be the main focus during a certain time, while during a different time, it will seem like nobody cares.
This is why it’s important to stay informed and know what the market is focusing on at the moment.
✅Special Attention to News from the U.S.
The United States is still considered the world’s most powerful country, whether it’s in the domain of military affairs, geopolitics, industry, energy, science, culture, and technology.
It is even described as a “financial superpower.”
Even if its position has been eroded by setbacks, imbalances, and weaknesses, the strength and influence of the US dollar will not be matched anytime soon.
The United States still has the largest economy in the world and the U.S. dollar is the world’s reserve currency.
This means that the U.S. dollar is a participant in about 90% of all forex transactions, which makes U.S. news and data important to watch.
✅In addition to inflation reports and central bank speeches, you should also pay attention to geopolitical news such as
👉Pandemics
👉Wars
👉Natural disasters
👉Political unrest and protests
👉Upcoming elections
👉Choose Currency Pairs to Trade the News
After identifying the event to monitor, you now want to trade the currency associated with that event’s economy.
Choosing the appropriate currency pair is an important decision when “Trading the News”.
As a news trader, you are trying to achieve two things:
Take advantage of the short-term spike in volatility…
While keeping your transaction costs as low as possible
Because news can bring increased volatility in the forex market (and more trading opportunities), it is important that we trade currencies that are deeply liquid.
Currencies with deep liquidity have the tightest spreads which is what allows you to keep your transaction costs low.
✅Liquid currency pairs give us a reassurance that our orders will be executed smoothly and without any “hiccups”.
EUR/USD
GBP/USD
USD/JPY
USD/CHF
USD/CAD
AUD/USD
☝️These are all major currency pairs!
Remember, because they have the most liquidity, majors pairs usually have the tightest spreads.
Since spreads widen when news reports come out, it makes sense to stick with those pairs that have the tightest spreads, to begin with.
Now that we know which news events and currency pairs to trade, let’s take a look at some approaches to trading the news.
2 Ways to Trade the News
here’s no single strategy for trading the news.
When the news hits, the price tends to spike in one direction or has a muted reaction to the data as traders digest the outcome against market expectations.
Knowing this, there are two main approaches to trade the news:
👉a) Having a directional bias
👉b) Having a non-directional bias
👉Directional Bias
Having a directional bias means that you expect the market to move a certain direction once the news report is released.
When looking for a trade opportunity in a certain direction, it is good to know what it is about news reports that will cause the market to move.
👉Non-Directional Bias
A more common news trading strategy is the non-directional bias approach.
This method disregards a directional bias and simply plays on the fact that a big news report will create a big move.
It doesn’t matter which way the forex market moves. We just want to be there when it does!
What this means is that once the market moves in either direction, you have a plan in place to enter that trade.
You don’t have any bias as to whether the price will go up or down, hence the name non-directional bias.
✅Consensus vs. Actual Number
Several days or even weeks before a news report comes out, there are analysts that will come up with some kind of forecast on what numbers will be released.
As we talked about in a previous lesson, this number will be different among various analysts, but in general, there will be a common number that a majority of them agree on.
This number is called a consensus.
When a news report is released, the number that is given is called the actual number.
👉“Buy the rumor, sell on the news.”👈
This is a common phrase used in the forex market because often times it seems that when a news report is released, the movement doesn’t match what the report would lead you to believe.
For example, let’s say that the U.S. unemployment rate is expected to increase. Imagine that last month the unemployment rate was at 8.8% and the consensus for this upcoming report is 9.0%.
With a consensus at 9.0%, it means that all the big market players are anticipating a weaker U.S. economy, and as a result, a weaker dollar.
So with this anticipation, big market players aren’t going to wait until the report is actually released to start acting on taking a position.
They will go ahead and start selling off their dollars for other currencies before the actual number is released.
Trade the News With a Directional Bias
U.S. Unemployment Report showed improvement, why did USD still weaken?
let’s say the unemployment rate showed a surprising DROP.
Which is a good thing since that means more people now have jobs.
But you look at your charts and the dollar is FALLING!
Overall Economic Outlook Still Poor
The first reason could be that the long-term and overall trend of the U.S. economy is still in a downward spiral.
Remember that there are several fundamental factors that play into an economy’s strength or weakness.
Although the unemployment rate dropped, it might not be a big enough catalyst for the big traders to start changing their perception of the dollar.
U.S. Unemployment Report showed improvement, why did USD still weaken?
let’s say the unemployment rate showed a surprising DROP.
Which is a good thing since that means more people now have jobs.
But you look at your charts and the dollar is FALLING!
Overall Economic Outlook Still Poor
The first reason could be that the long-term and overall trend of the U.S. economy is still in a downward spiral.
Remember that there are several fundamental factors that play into an economy’s strength or weakness.
Although the unemployment rate dropped, it might not be a big enough catalyst for the big traders to start changing their perception of the dollar.
Positive Employment Numbers Are Temporary
Perhaps it’s right after Thanksgiving during the holiday rush. During this time, many companies normally hire seasonal employees to keep up with the influx of Christmas shoppers.
This increase in jobs may cause a short term drop in the unemployment rate, but it’s not at all indicative of the long-term outlook for the U.S. economy.
A better way to get a more accurate measure of the unemployment situation would be to look at the number from last year and compare it to this year. This would allow you to see if the job market actually improved or not.
The important thing to remember is to always take a step back and look at the overall picture before making any quick decisions.
👉Trade the News With a Directional Bias
How to Trade the News With a Directional Bias in ForexLet’s stick with our unemployment rate example to keep it simple.
The first thing you would want to do before the report comes out is to take a look at the trend of the unemployment rate to see if it has been increasing or decreasing.
By looking at what has been happening in the past, you can prepare yourself for what might happen in the future.
Imagine that the unemployment rate has been steadily increasing.
Six months ago it was at 1% and last month it topped out at 3%.
✅You could now say with some confidence that jobs are decreasing and that there is a good possibility the unemployment rate will continue to rise.
Since you are expecting the unemployment rate to rise, you can now start preparing to go short on the dollar.
This is your directional bias.
Particularly, you feel like you could short USD/JPY.
Just before the unemployment rate is about to be announced, you could look at the price movement of USD/JPY at least 20 minutes prior and find the range of movement.
Take note of the high and low that is made. This will become your breakout points.
💹The key to having a directional bias is that you must truly understand the concepts behind the news report that you plan to trade.
❌If you don’t understand what effect it can have on particular currencies, then you might get caught up in some bad setups.
This increase in jobs may cause a short term drop in the unemployment rate, but it’s not at all indicative of the long-term outlook for the U.S. economy.
A better way to get a more accurate measure of the unemployment situation would be to look at the number from last year and compare it to this year. This would allow you to see if the job market actually improved or not.
The important thing to remember is to always take a step back and look at the overall picture before making any quick decisions.
👉Trade the News With a Directional Bias
How to Trade the News With a Directional Bias in ForexLet’s stick with our unemployment rate example to keep it simple.
The first thing you would want to do before the report comes out is to take a look at the trend of the unemployment rate to see if it has been increasing or decreasing.
By looking at what has been happening in the past, you can prepare yourself for what might happen in the future.
Imagine that the unemployment rate has been steadily increasing.
Six months ago it was at 1% and last month it topped out at 3%.
✅You could now say with some confidence that jobs are decreasing and that there is a good possibility the unemployment rate will continue to rise.
Since you are expecting the unemployment rate to rise, you can now start preparing to go short on the dollar.
This is your directional bias.
Particularly, you feel like you could short USD/JPY.
Just before the unemployment rate is about to be announced, you could look at the price movement of USD/JPY at least 20 minutes prior and find the range of movement.
Take note of the high and low that is made. This will become your breakout points.
💹The key to having a directional bias is that you must truly understand the concepts behind the news report that you plan to trade.
❌If you don’t understand what effect it can have on particular currencies, then you might get caught up in some bad setups.
The first thing to consider is which news reports to trade.
Earlier, we discussed the biggest moving news releases.
Ideally, you would want to only trade those reports because there is a high probability the market will make a big move after their release.
The next thing you should do is take a look at the range at least 20 minutes before the actual news release.
The high of that range will be your upper breakout point, and the low of that range will be your lower breakout point.
Note that the smaller the range is the more likely it is you will see a big move from the news report.
The breakout points will be your entry levels.
This is where you want to set your orders. Your stops should be placed approximately 20 pips below and above the breakout points, and your initial targets should be about the same as the range of the breakout levels.
Straddle Trade
This is known as a straddle trade.
You are looking to play BOTH sides of the trades.
Earlier, we discussed the biggest moving news releases.
Ideally, you would want to only trade those reports because there is a high probability the market will make a big move after their release.
The next thing you should do is take a look at the range at least 20 minutes before the actual news release.
The high of that range will be your upper breakout point, and the low of that range will be your lower breakout point.
Note that the smaller the range is the more likely it is you will see a big move from the news report.
The breakout points will be your entry levels.
This is where you want to set your orders. Your stops should be placed approximately 20 pips below and above the breakout points, and your initial targets should be about the same as the range of the breakout levels.
Straddle Trade
This is known as a straddle trade.
You are looking to play BOTH sides of the trades.
It doesn’t matter which direction the price moves, the straddle strategy will have you positioned to take advantage of it.Now that you’re prepared to enter the market in either direction, all you have to do is wait for the news to come out.
Sometimes you may get triggered in one direction only to find that you get stopped out because the price quickly reverses in the other direction.
However, your other entry will get triggered and if that trade wins, you should recoup your initial losses and come out with a small profit.
A best-case scenario would be that only one of your trades gets triggered and the price continues to move in your favor so that you don’t incur any losses.
☝️Either way, if done correctly you should still end up positive for the day.
One thing that makes a non-directional bias approach attractive is that it eliminates any emotions.
You just want to profit when the move happens.
This allows you to take advantage of more trading opportunities because you will be triggered either way.
As most news events tend to have a limited impact on longer-term price action, setting realistic profit targets should help to increase the number of winning trades.
There are many more strategies for trading the news, but the concepts mentioned in this lesson should always be part of your routine whenever you are working out an approach to taking advantage of news report movements.
Sometimes you may get triggered in one direction only to find that you get stopped out because the price quickly reverses in the other direction.
However, your other entry will get triggered and if that trade wins, you should recoup your initial losses and come out with a small profit.
A best-case scenario would be that only one of your trades gets triggered and the price continues to move in your favor so that you don’t incur any losses.
☝️Either way, if done correctly you should still end up positive for the day.
One thing that makes a non-directional bias approach attractive is that it eliminates any emotions.
You just want to profit when the move happens.
This allows you to take advantage of more trading opportunities because you will be triggered either way.
As most news events tend to have a limited impact on longer-term price action, setting realistic profit targets should help to increase the number of winning trades.
There are many more strategies for trading the news, but the concepts mentioned in this lesson should always be part of your routine whenever you are working out an approach to taking advantage of news report movements.
Carry Trade
A carry trade involves borrowing or selling a financial instrument with a low interest rate, then using it to purchase a financial instrument with a higher interest rate.
While you are paying the low interest rate on the financial instrument you borrowed/sold, you are collecting higher interest on the financial instrument you purchased.
So your profit is the money you collect from the interest rate differential.
✅Carry Trade Example:
Let’s say you go to a bank and borrow $10,000.
Their lending fee is 1% of the $10,000 every year.
With that borrowed money, you turn around and purchase a $10,000 bond that pays 5% a year.
You made 4% a year! The difference between interest rates!
☝️Currency Carry Trade
In the forex market, currencies are traded in pairs (for example, if you buy USD/CHF, you are actually buying the U.S. dollar and selling Swiss francs at the same time).
You pay interest on the currency position you SELL and collect interest on the currency position you BUY.
What makes the carry trade special in the spot forex market is that interest payments happen every trading day based on your position.
Technically, all positions are closed at the end of the day in the spot forex market. You just don’t see it happen if you hold a position to the next day.
Brokers close and reopen your position, and then they debit/credit you the overnight interest rate differential between the two currencies.
This is the cost of “carrying” (also known as “rolling over“) a position to the next day.The amount of leverage available from forex brokers have made the carry trade very popular in the forex market.
Most forex trading is margin based, meaning you only have to put up a small amount of the position and your broker will put up the rest. Many brokers ask as little as 1% or 2% of a position.
👉When Do Carry Trades Work?
Carry trades work best when investors feel risky and optimistic enough to buy high-yielding currencies and sell lower-yielding currencies.
Know When Carry Trades Work and When They Don't
It’s kinda like an optimist who sees the glass half full. While the current situation might not be ideal, he is hopeful that things will get better.
The same goes for carry trade.
Economic conditions may not be good, but the outlook of the buying currency does need to be positive.
If the outlook of a country’s economy looks as good as Angelina Jolie or Brad Pitt, then chances are that the country’s central bank will have to raise interest rates in order to control inflation.
This is good for the carry trade because a higher interest rate means a bigger interest rate differential.
👉When Do Carry Trades NOT Work?
On the other hand, if a country’s economic prospects aren’t looking too good, then nobody will be prepared to take on the currency.
Especially if the market thinks the central bank will have to lower interest rates to help their economy.
To put it simply, carry trades work best when investors have low risk aversion.
Carry trades do not work well when risk aversion is HIGH (i.e. selling higher-yielding currencies and buying back lower-yielding currencies).
When risk aversion is high, investors are less likely to take risky ventures.
Trade Criteria and Risk
It’s pretty simple to find a suitable pair to do a carry trade.
A carry trade involves borrowing or selling a financial instrument with a low interest rate, then using it to purchase a financial instrument with a higher interest rate.
While you are paying the low interest rate on the financial instrument you borrowed/sold, you are collecting higher interest on the financial instrument you purchased.
So your profit is the money you collect from the interest rate differential.
✅Carry Trade Example:
Let’s say you go to a bank and borrow $10,000.
Their lending fee is 1% of the $10,000 every year.
With that borrowed money, you turn around and purchase a $10,000 bond that pays 5% a year.
You made 4% a year! The difference between interest rates!
☝️Currency Carry Trade
In the forex market, currencies are traded in pairs (for example, if you buy USD/CHF, you are actually buying the U.S. dollar and selling Swiss francs at the same time).
You pay interest on the currency position you SELL and collect interest on the currency position you BUY.
What makes the carry trade special in the spot forex market is that interest payments happen every trading day based on your position.
Technically, all positions are closed at the end of the day in the spot forex market. You just don’t see it happen if you hold a position to the next day.
Brokers close and reopen your position, and then they debit/credit you the overnight interest rate differential between the two currencies.
This is the cost of “carrying” (also known as “rolling over“) a position to the next day.The amount of leverage available from forex brokers have made the carry trade very popular in the forex market.
Most forex trading is margin based, meaning you only have to put up a small amount of the position and your broker will put up the rest. Many brokers ask as little as 1% or 2% of a position.
👉When Do Carry Trades Work?
Carry trades work best when investors feel risky and optimistic enough to buy high-yielding currencies and sell lower-yielding currencies.
Know When Carry Trades Work and When They Don't
It’s kinda like an optimist who sees the glass half full. While the current situation might not be ideal, he is hopeful that things will get better.
The same goes for carry trade.
Economic conditions may not be good, but the outlook of the buying currency does need to be positive.
If the outlook of a country’s economy looks as good as Angelina Jolie or Brad Pitt, then chances are that the country’s central bank will have to raise interest rates in order to control inflation.
This is good for the carry trade because a higher interest rate means a bigger interest rate differential.
👉When Do Carry Trades NOT Work?
On the other hand, if a country’s economic prospects aren’t looking too good, then nobody will be prepared to take on the currency.
Especially if the market thinks the central bank will have to lower interest rates to help their economy.
To put it simply, carry trades work best when investors have low risk aversion.
Carry trades do not work well when risk aversion is HIGH (i.e. selling higher-yielding currencies and buying back lower-yielding currencies).
When risk aversion is high, investors are less likely to take risky ventures.
Trade Criteria and Risk
It’s pretty simple to find a suitable pair to do a carry trade.
Look for two things:
Find a high interest differential.
Find a pair that has been stable or in an uptrend in favor of the higher-yielding currency. This gives you the ability to stay in the trade AS LONG AS POSSIBLE and profit off the interest rate differential.
☝️This is a weekly chart of AUD/JPY. Up until recently, the Bank of Japan has maintained a “Zero Interest Rate Policy” (currently, the interest rate stands at 0.10%).
Also known as ZIRP.
With the Reserve Bank of Australia touting one of the higher interest rates among the major currencies (4.50% in the chart example), many traders have flocked to this pair (one of the factors creating a nice little uptrend in the pair).
From the start of 2009 to early 2010, this pair moved from a price of 55.50 to 88.00 – that’s 3,250 pips!
If you couple that with interest payments from the interest rate differential of the two currencies, this pair has been a nice long term play for many investors and traders able to weather the volatile up and down movements of the currency market.
Of course, economic and political factors are changing the world daily.
Interest rates and interest rate differentials between currencies may change as well, bringing popular carry trades (such as the yen carry trade) out of favor with investors.
👉Carry Trade Risk
Because you are a very smart trader, you already know what the first question you should ask before entering a trade is right?
Before entering a trade you must ALWAYS assess your max risk and whether or not it is acceptable according to your risk management rules.
In the example at the start of the lesson with Joe the Newbie Forex Trader, his maximum risk would have been $9,000. His position would be automatically closed out once his losses hit $9,000.
Remember, this is the worst possible scenario and Joe is a newbie, so he hasn’t fully appreciated the value of stop losses.
When doing a carry trade, you can still limit your losses like a regular directional trade.
For instance, if Joe decided that he wanted to limit his risk to $1,000, he could set a stop order to close his position at whatever the price level would be for that $1,000 loss.
He would still keep any interest payments he received while holding onto the position.
Find a pair that has been stable or in an uptrend in favor of the higher-yielding currency. This gives you the ability to stay in the trade AS LONG AS POSSIBLE and profit off the interest rate differential.
☝️This is a weekly chart of AUD/JPY. Up until recently, the Bank of Japan has maintained a “Zero Interest Rate Policy” (currently, the interest rate stands at 0.10%).
Also known as ZIRP.
With the Reserve Bank of Australia touting one of the higher interest rates among the major currencies (4.50% in the chart example), many traders have flocked to this pair (one of the factors creating a nice little uptrend in the pair).
From the start of 2009 to early 2010, this pair moved from a price of 55.50 to 88.00 – that’s 3,250 pips!
If you couple that with interest payments from the interest rate differential of the two currencies, this pair has been a nice long term play for many investors and traders able to weather the volatile up and down movements of the currency market.
Of course, economic and political factors are changing the world daily.
Interest rates and interest rate differentials between currencies may change as well, bringing popular carry trades (such as the yen carry trade) out of favor with investors.
👉Carry Trade Risk
Because you are a very smart trader, you already know what the first question you should ask before entering a trade is right?
Before entering a trade you must ALWAYS assess your max risk and whether or not it is acceptable according to your risk management rules.
In the example at the start of the lesson with Joe the Newbie Forex Trader, his maximum risk would have been $9,000. His position would be automatically closed out once his losses hit $9,000.
Remember, this is the worst possible scenario and Joe is a newbie, so he hasn’t fully appreciated the value of stop losses.
When doing a carry trade, you can still limit your losses like a regular directional trade.
For instance, if Joe decided that he wanted to limit his risk to $1,000, he could set a stop order to close his position at whatever the price level would be for that $1,000 loss.
He would still keep any interest payments he received while holding onto the position.
Thanks for reading: FORE MASTERY ACADEMY @Zw
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